Nearly all states support students pursuing higher education through grant programs based on academic merit, financial need, or a combination of the two. However, changes to how the federal government calculates a student’s ability to pay and the expansion of eligibility for the need-based federal Pell grant have caused ripple effects for some state grant programs, particularly those that base their awards on the federal calculation.

These federal changes will pose budget pressures for some states, making it more challenging to maintain their grant programs’ effectiveness. If needed, states should embrace a proactive, principle-driven approach to adjusting financial aid allotments that focuses on fulfilling the program’s goals. Absent careful thought about maintaining aid awards for students with significant financial need, students’ ability to finance postsecondary education could be diminished.

How grant program characteristics interact with federal aid changes

The FAFSA Simplification Act significantly changed the calculation of a student’s ability to pay for college. The new Student Aid Index (SAI) replaced the former Expected Family Contribution (EFC) for the 2024–25 academic year. Before, a student’s EFC was divided by the number of children in the family attending college. The removal of this step in the new SAI has meant some students have received smaller Pell grant awards or lost eligibility altogether. But for most students, the new calculation reduced measured ability to pay, leading more students to be eligible for Pell grants and many students to qualify for larger awards.

State need-based grants frequently supplement Pell grants to support students from families with low and moderate incomes when paying for college. Some states have linked the eligibility rules for their grant aid to how the federal government defines students’ ability to pay (regardless of whether they qualify for federal aid). Because the new federal formula generally finds that students can afford less, students in states that link eligibility to this formula may suddenly qualify for more state aid even though the state hasn’t changed its program. Other states rely on income levels to determine aid eligibility so will be less affected by federal changes.

Three characteristics of the grant programs may influence the extent of the federal changes’ effects.

1. Awarding “last-dollar” versus “first-dollar” state aid
   In some states, including Minnesota, state grants fill the gap between a student’s SAI plus Pell award and a specified share of students’ cost of attendance. Such programs, which determine awards after considering other grant aid, are known as “last dollar” programs and are vulnerable to increases in federal need not met by Pell. “First-dollar” programs, which award aid without regard to Pell, face a similar problem only if their awards are linked to SAI levels. 
   
   The exact amount of the last dollar gap that must be filled depends on both the student’s SAI and their Pell award. Most Pell recipients now receive additional federal aid, meaning these students won’t require additional aid allotments from last dollar programs. But for many students who don’t qualify for Pell grants or who receive smaller awards, eligibility for state grants increases, potentially prompting larger awards from the state. Some first-dollar programs are also likely to experience additional cost pressures as more students meet SAI eligibility thresholds.
2. Determining aid eligibility using income versus SAI
   Some need-based state grant programs—including California’s Middle Class Scholarship, Indiana’s 21st Century Scholars Program, and New York’s Tuition Assistance Program—use a maximum income cutoff to determine eligibility. Changes to the student aid calculation did not directly affect these programs. But most need-based state grant programs based on ability to pay rely on student costs minus the federally determined SAI. These programs, if not modified, would need to increase aid and funding because most SAIs are lower than EFCs were.
3. Disbursing funding as entitlements versus rationing
   Another issue differentiating states is whether their grant programs are entitlements, which fund all eligible students, or if they ration limited available funds. Rationing may involve funding students on a first-come, first-served basis, awarding smaller grants across the board, or tightening eligibility criteria such as academic standards. 
   
   Entitlement programs based on SAI are common nationwide (about half of states have at least one), but most of these programs are small and aimed at specific groups of students. However, the major state grant programs in states like New Jersey and Minnesota are entitlements, and other states have promise programs guaranteeing free tuition to some groups of students.
   
   As measured need increases, these states will likely need to modify the parameters of their programs. State policymakers can save money by lowering the SAI threshold, decreasing the size of the grants, or finding another way to reduce expenses. Otherwise, states must increase their budgets.

How can state-grant aid programs adjust to the federal changes?

When limiting expenses, policymakers need to make trade-offs. A real danger is that the immediacy of budget pressures resulting from federal changes will push concerns about optimal program design into the background.

Cost pressures from higher measured federal need could motivate some states to add or maintain exclusions based on age, high school graduation date, part-time enrollment, or transfer status. Any of these changes would limit college access for some students most in need of support.

States with first-dollar programs that award their grants based on need or SAI (as opposed to income) will face financial pressures if they don’t lower their eligibility thresholds. A promise of a $3,000 state grant to anyone with an SAI below $5,000 will apply to more students than it did before the formula change. Last-dollar programs, which allow increases in Pell grants to reduce state grant eligibility, will face the same issue for non-Pell recipients who have been promised that their aid will meet a certain share of their costs.

State programs that use an SAI cut-off—such as the Illinois Monetary Award Program, Indiana’s Frank O’Bannon grant, and Ohio’s College Opportunity grant—will have more eligible students unless they lower the threshold. Most of these states did not lower eligibility thresholds for 2024–25 but may do so in subsequent years. Lowering the threshold will maintain the programs’ previous structure, address state budgetary pressures by not following the federal government’s lead in redefining financial capacity, and prevent the elimination of aid to the neediest students.

Looking ahead to additional federal financial aid changes

With a looming Pell funding shortfall, massive cuts to the US Department of Education already ordered, and the potential elimination of the department on the horizon, further changes to federal student aid—such as loan limits, loan repayment, institutional accountability, and reduced Pell grant amounts—could all affect the allocation of state financial aid dollars.

Limits on student lending could prompt more students to seek out state loans if available. A less generous student loan repayment plan may push more students to enroll in less-costly, in-state public institutions. Changes to Pell could widen the gap between cost of attendance and estimated need. And broader changes—such as reductions in funding for other state programs such as Medicaid—could strain state grant program budgets.

With substantial federal uncertainty, states concerned with higher education access should aim to fund all eligible students. When this is untenable, states should proactively assess how changing eligibility criteria may affect different groups of students. The changes to federal student aid calculations did not change students’ actual circumstances, so states must understand that sacrificing existing aid structures to meet newly defined need may be a counterproductive trade-off.